What is “residual value”?

[Kings Gambit]

We’ve heard this term “residual value” mentioned in discussions of yachts’ market pricing. Beyond comparisons of sale price among comparable models of similar size and age, how do we estimate “residual value” if there is such a thing? My working definition has been that a yacht reaches its minimum residual value when inflation halts or slows significantly its depreciation. If you bought a yacht 20 years ago for, say, $150,000 the equivalent yacht price in 2024 would be $250,523. Annual depreciation at 5% on the declining balance starting at $250,523 would be to $89,000 after 20 yr. Depreciating on the original sale price after 20 yr brings it to $53,771. Assuming depreciation going forward effectively matches annual inflation, would either of those values become its “residual value.” How would one decide? What would be the estimated asset value of the yacht today lacking a market survey? Is there a distinction between “asset value” and “market value”? People say correctly that it’s worth what you can sell it for, i.e. the market value is the asset value. But what if you are not selling?

 

[thinwater]

Unless a time period and level of maintenance is specified it is a meaningless term. A typical accurate use would be projected value of a car a the end of a set lease period, and even that includes a mileage and condition correction.

It can also refer to scrap value of industrial equipment or a project that has a know life span, after which the buildings and infrastructure may have resale value. If the plant must be decontaminated and scrapped first, maybe the net is negative.

In the context you describe, it sounds like salesmanship. It isn't nonsense. I buy a boat, I spend money on repairs, upgrades, and maintenance, and some day I (or my heirs) will sell it, so there is residual value, but when and how much is quite variable. Same for a house or car (not leased). The value could go up. In the case of a boat, it can even go negative.

In my case, I have owned 3 boats that I have sold. Each was in good condition when bought, I kept each 10-14 years, and sold each for more than I paid, but less than the inflated value. I had also kept them up. So yes, the residual value was real. If you want to get technical about it, do a discounted cash flow, including assumptions about inflation, costs, rate or return of your alternative investments, and resale. You will end up with a net present value estimate of the investment. You won't like it, so just go sailing.

 

[dLj]

It's my understanding that residual value is the value of an asset after it's working life is past. Can also be called "salvage value".

It's mainly a term used in business for tax purposes. So there are a lot of different ways it's calculated.

Why do you want to determine this?

dj

p.s. Federal tax law will not allow you to use 20 years - it can't be longer than 10 years. So calculating depreciation until reaching residual value must be done at most in a 10 year period.

 

[jssailem]

But what if you are not selling?

Ahhh... you might be seeking a boat's Intrinsic value.
In finance, intrinsic value helps define the nature of market value. Is the item over or undervalued? If so, by how much? Is the premium worth it? Is this a bargain? Exploring this about a boat may be influenced by the season or location.

Understanding Intrinsic Value​

There is no universal standard for calculating a company's or stock's intrinsic value. Financial analysts attempt to determine an asset's intrinsic value by using fundamental and technical analyses to gauge its financial performance.​

​

While they may build valuation models using qualitative, quantitative, and perceptual business factors, discounted cash flows are often used in calculations for intrinsic value.​

​

For this approach to be relevant when using a boat rather than a stock, one would need to define the parameters and assumptions. Valuing a boat involves many subjective elements, thus the challenge and possibly the reliance on the phrase used.

People say correctly that it’s worth what you can sell it for,

 

[Kings Gambit]

It's my understanding that residual value is the value of an asset after it's working life is past. Can also be called "salvage value".

It's mainly a term used in business for tax purposes. So there are a lot of different ways it's calculated.

Why do you want to determine this?

dj

p.s. Federal tax law will not allow you to use 20 years - it can't be longer than 10 years. So calculating depreciation until reaching residual value must be done at most in a 10 year period.

Thanks, dLj

I would not equate “residual value” with “salvage value” when speaking of boats. I’ve come to see salvage as when the boat’s market value is less than the cost of its repaired condition after some damage, such as a fire below that ruins everything, a sinking that is refloated, or a collision/allision that pretty much wrecks the boat but does not sink it, etc. Before the damage it was just fine even if old and highly depreciated. So, “salvage” is an insurance term for a damaged boat that the ins company does not want to repair, etc. Or, the thing is “broken”, it’s working life is past, it’s now “salvage” regardless of its value prior to damage, etc.

thinwater’s reply/explanation closely approaches how I am viewing this thing I introduced as “residual value.”

Why might I wish to know my boat’s “residual value?” Lately, I’ve been thinking about insurance costs. What might a 20-yr production boat be adequately insured for?—-say, it’s “Agreed Hull Value.” Should that be its replacement value? What’s that? Surely, not the price of new one. One that’s 20 years old and of comparable build quality and condition/up-keep. Take my $89,000 figure above (#1). Look at a few similar boats, similarly equipped, on the market for $89,000. Would they be fair replacements, etc.? Would the ins company agree to insure at that amount?

Hey, KG just get it surveyed/appraised, that’s what ins will likely want. Duh. OK; there goes a boat buck! Doesn’t cost anything to sit here and chat with you friends and experts about it first!

 

[jssailem]

If I understand this, the value is relative to the utility you receive. The value, used for insurance reimbursement, is enough to replace the boats utility not the boats market value (as is so often used in the process of a survey.)

 

[Kings Gambit]

If I understand this, the value is relative to the utility you receive. The value, used for insurance reimbursement, is enough to replace the boats utility not the boats market value (as is so often used in the process of a survey.)

I think that’s a fair way of putting it. Lately, I’ve been wondering if the boat might be “under-insured” today b/c insurance has never called for it’s survey at the agreed hull value, which has not changed over the past 10 years.

 

[jssailem]

I am in the condition. Come April and the work I have completed on the boat, I will be considering what approach to take. I note that my boat is 50 years old now.

 

[Tally Ho]

This is a pretty good read on “Residual value” of an asset…

https://www.investopedia.com/terms/r/residual-value.asp

My short definition would be the value of a boat (in this case) when I want to sell it.

Greg

 

[FastOlson]

I think that’s a fair way of putting it. Lately, I’ve been wondering if the boat might be “under-insured” today b/c insurance has never called for it’s survey at the agreed hull value, which has not changed over the past 10 years.

When I re-insured our boat after the full re-fit in 2021, I doubled the agreed $ amount. While this did increase the premium, I viewed the purpose as insuring money spent on making the boat "new" again. If lost thru fire or sinking, I want to be able to replace it with a Truly Comparable vessel. Based on that calculation alone, we are still underinsured by 20+ thousand $, but at least we're sorta in the ballpark.
You should check the selling prices for vessels that are at the same level of repair/condition as your boat is presently. Odds are that you are underinsured, considerably.
Remember that the Ins. Co. "value" database is based on generally declining values for almost all of their insured assets. As a very rough comparison, I would note that in my 150 slip moorage (private yacht club), there are less than ten boats with recent LPU paint jobs or new diesels, and only about half that many with full 100% re-bedding of all deck fittings. Admittedly we do have advantages over other clubs or moorages in that we have a couple of master ship wrights as members (and also the regional dealer for Betamarine). Mighty Fortunate, we are.

 

[Kings Gambit]

This is a pretty good read on “Residual value” of an asset…

https://www.investopedia.com/terms/r/residual-value.asp

My short definition would be the value of a boat (in this case) when I want to sell it.

Greg

Thanks, Tally
I see that I have conflated some definitions. Evidently, the term “depreciation” has two meanings. The accounting version which includes reference to the end of the useful life of a business asset, whereupon it arrives at its “residual value”, a.k.a. “salvage value”, and may be sold, and the more general version which refers to the loss of value of an asset with age due to wear, but which does not end at a predetermined point (i.e., the salvage value) to be sold. The depreciation schedule of a business asset is based on an estimate of its value after a set period of service, say 5 years, at which point it is taken out of service and likely sold. It is then “fully depreciated” and is no longer useful as a tax deduction against business income.

A better (parallel) term here would be “devaluation” of the boat with age so as not to confuse it with depreciation in the accounting sense for tax purposes. There is no “salvage value” stop-point unless the boat is wrecked. So, that is not an alternative word here for “residual value.” Rephrasing, the “residual value” is the nominal value of the boat in inflated (today’s) dollars relative to the new purchase price. At some point its devaluation from the original price stops, more or less, b/c its loss of value relative to the original price is restored with inflated dollars. If the boat originally costs $150,000 in 2004, and it is valued at $50,000 in 2024, 2025, 2026 and on, it reached its “residual value” in today’s (current) dollars, IMO.

 

[shemandr]

If you were to plot a boat's value from when it is new to what it is 50 years later, I think you it would be a curve that descends fairly rapidly in the first years and then flattens out toward the later years. In my limited math training, it is like an asymptote. The value of the boat eventually doesn't get very much lower. I would call that the intrinsic value.
Or am I torturing 60 year old high school math?
For example take a Pearson 26. I think they sell for nearly the same value as they did 20 years ago - something around $5,000. Some higher and some lower but I look at $5000 as about the correct price.

 

[Kings Gambit]

If you were to plot a boat's value from when it is new to what it is 50 years later, I think you it would be a curve that descends fairly rapidly in the first years and then flattens out toward the later years. In my limited math training, it is like an asymptote. The value of the boat eventually doesn't get very much lower. I would call that the intrinsic value.
Or am I torturing 60 year old high school math?
For example take a Pearson 26. I think they sell for nearly the same value as they did 20 years ago - something around $5,000. Some higher and some lower but I look at $5000 as about the correct price.

Thanks, shemandr. That’s a great illustration of how I see it might work! The exercise for me at this point is to determine in some quantitative fashion approximately where on that green curve my boat is today w/o having to sell or survey it. I suppose that is what tables of book values do for yacht brokers, banks, and insurance people, etc.

 

[jssailem]

One might conjecture that the brokers, banks and insurance people all arrive at the same quantitative value for a yacht posted in their book. This is not a reality. It is an interesting query. Have you explored AI to discover an approximation?

 

[Kings Gambit]

One might conjecture that the brokers, banks and insurance people all arrive at the same quantitative value for a yacht posted in their book. This is not a reality. It is an interesting query. Have you explored AI to discover an approximation?

No, but that could be an interesting attempt.

 

[jssailem]

I posed the query in AI and received this response. Most of this has been addressed in developing this thread.

To calculate or estimate the residual value, one might consider the original purchase price, subtract the depreciation based on age and condition, and adjust for market conditions and any enhancements or degradation in the boat's state. However, this is more an art than a science, often requiring professional appraisals or market analysis for accuracy.​

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Remember, the residual value is an estimate and can fluctuate based on real-time market dynamics, the specific features of the sailboat, and its maintenance history.​

The residual value of a sailboat refers to its estimated worth at the end of its useful life or lease period. This value is influenced by several factors including:

• Depreciation: Like most physical assets, sailboats depreciate over time. The rate can vary significantly based on factors like the brand, model, maintenance, and market demand. Generally, sailboats lose value at a rate where they might retain about 73% of their initial value after 10 years, with 91% after three years and 85% after five years. This depreciation is not linear and can be influenced by the boat's condition, upgrades, and how it was used (e.g., saltwater vs. freshwater).
• Market Conditions: The supply and demand for similar boats in the market at the time of resale can greatly affect residual value. If there are many similar boats for sale, the value might decrease, whereas a shortage might increase it.
• Maintenance and Condition: A well-maintained sailboat with documented care, upgrades, and regular maintenance will retain a higher residual value than one that has been neglected. Mechanical condition, cosmetic appearance, and the integrity of rigging and other sailing components are crucial.
• Brand and Model: Some brands and models are known for holding their value better due to their reputation, build quality, or demand. For example, certain models from brands like Catalina or Beneteau might hold their value better than others.
• Usage and Environment: Boats used in harsh conditions like saltwater environments might depreciate faster due to corrosion and other wear. Conversely, boats kept in freshwater or under good care might depreciate more slowly.
• Age and Historical Value: Some older models, especially those considered classics or those from renowned builders, can appreciate in value if they are in excellent condition or if there's a revival in interest for that particular style or brand.

 

[jssailem]

Not sure if different AI systems might reach different solutions.

 

[Kings Gambit]

Thanks, John

But “useful life” IMO ends when it is fully depreciated for tax purposes, and therefore no longer useful as a deductible business expense. Has nothing to do with the condition of the boat and its usefulness in further boating.

 

[Tally Ho]

In my career working with fixed assets, which were leased to customers, and that had a regulatory life of 50 years, there was a significant difference between “end of useful life” and ”end of lease period”. We did not use them interchangeably.

End of lease was the time to consider the “residual” value and decide if we kept the asset and leased it out again, or potentially sold the asset on the secondary market (the real ’residual’ value in my mind), or scrap it (scrap or salvage value).

As others have said, there is no exact value that everyone would calculate or agree on.

Sailboats don’t have a “regulatory” end of life…so it makes it even harder to come up with a calculation. And “salvage value” often means the cost to cut up the boat (a cost…not a positive value).

Greg

 

[jssailem]

Many questions have been raised in this thread. It has taken the thread in multiple directions as each participant has attempted to describe the "Beast" from their perspective as more questions have been introduced and some context has been clarified.

• how do we estimate “residual value” if there is such a thing?
• My working definition has been that a yacht reaches its minimum residual value when inflation halts or slows significantly its depreciation.
• Assuming depreciation going forward effectively matches annual inflation, would either of those values become its “residual value.” How would one decide?
• What would be the estimated asset value of the yacht today lacking a market survey?
• Is there a distinction between “asset value” and “market value”?
• People say correctly that it’s worth what you can sell it for, i.e. the market value is the asset value. But what if you are not selling?

Rationale for this Thread: "Why might I wish to know my boat’s “residual value?” Lately, I’ve been thinking about insurance costs."

• What might a 20-yr production boat be adequately insured for?—-say, it’s “Agreed Hull Value.”
• Should that be its replacement value?
• What’s that? Surely, not the price of new one. One that’s 20 years old and of comparable build quality and condition/up-keep.

Agreed Hull Value...An insurance contract monetary term reached by consensus of two parties.

In post #13 we are given a narrowing of the query' focus.
" The exercise for me at this point is to determine in some quantitative fashion approximately where on that green curve my boat is today w/o having to sell or survey it. I suppose that is what tables of book values do for yacht brokers, banks, and insurance people, etc."

The rub is the desire to "to determine in some quantitative fashion approximately" a value ("residual value") that can be used to reach the "Agreed Hull Value" to be negotiated with the Insurance underwriter.

Presumably you will be "Shopping" the underwriters to find a value that you are willing to pay a premium for the insurance,
There appears to be multiple subjective elements to this quest for a quantitive solution.

Why do Underwriters then insist on a "Survey"?